This article will explain Idaho’s current taxation policies and how they may affect SaaS companies in specific situations.
Taxation rules in Idaho
As outlined in the Idaho Sales and Use Tax Administrative Rules, Idaho does not impose a sales tax on SaaS products. Rule 027 classifies SaaS as different from software sold in a tangible or downloadable format, which is taxable.
Because SaaS is typically delivered via the cloud and is not downloaded onto a user’s hardware, it is not subject to sales tax in Idaho.
Are digital goods taxable in Idaho?
Certain digital goods, including digital music, e-books, videos, and games, are subject to sales tax in Idaho. In addition, canned software (software sold in a tangible or digital format) is taxed at the state level.
This includes prewritten software that is sold, leased, or licensed to multiple customers without substantial modification. If SaaS providers also sell canned software, those transactions will be subject to Idaho’s statewide sales tax rate of 6%, as well as any applicable local taxes.
However, Idaho Sales and Use Tax Rule 027 distinguishes between canned software and custom software, which is created specifically for an individual customer. Unlike canned software, custom software is not subject to sales tax. For example, if a SaaS provider customizes a platform’s features or develops unique code for a specific client, those services are tax-exempt, as long as the charges are stated separately on the invoice. The rule also mentions statistical reports or data services that are in tangible or electronic forms as taxable unless the service involves substantial customization or expertise.
While SaaS may not be taxed in Idaho, compliance is still important
Even though Idaho does not explicitly tax SaaS, businesses operating in multiple states must pay attention to those states’ varying sales tax laws in order to remain compliant. For example, Washington and Utah (which neighbor Idaho) both tax SaaS:
- Washington: Washington taxes digital products and services sold to customers in the state, treating them as retail sales and subjecting them to sales tax.
- Utah: According to the Utah State Tax Commission, license fees for remotely accessed prewritten software are taxable if the purchased software is used in Utah. If a SaaS product includes these types of fees, the provider can be responsible for collecting sales and use tax.
For companies with customers in multiple states, SaaS taxation can get complicated. In addition to learning which jurisdictions apply a tax, SaaS providers will need to determine where they meet nexus thresholds.
How does nexus work in Idaho?
The term “nexus” refers to a business’s connection to a state. When a business meets a nexus threshold in a state, it is obligated to collect and remit taxes on taxable sales there. In Idaho, nexus falls into one of two categories: physical and economic.
- Physical nexus: In Idaho, physical nexus can be established when a business has offices, warehouses, inventory, representatives, or property in the state.
- Economic nexus: For businesses that serve customers in Idaho but that don’t have physical nexus in the state (also known as “remote sellers"), it is possible to establish economic nexus. This occurs when gross sales exceed $100,000 in the previous or current calendar year.
Establishing nexus does not automatically mean that a SaaS company will need to collect and remit sales tax. It is one of several factors that providers need to consider if they want to stay compliant.
How to stay compliant as a SaaS provider
Even though Idaho does not currently tax SaaS, it could in the future. Additionally, SaaS providers operating in multiple states (including those around Idaho) may still need to collect and remit sales tax. While the precise procedures for compliance can vary from state to state, the process typically involves the following steps:
- Registration: Once a SaaS company determines that it has nexus within a state, it needs to register with that state’s tax authority. In Idaho, this is the Idaho State Tax Commission.
- Calculation: After registering, SaaS providers will want to determine what the current tax rate is for each state they operate in. These rates can change from year to year, so it is important to stay current in order to use the correct rate. Certain states also have local sales taxes, which can vary by county, city, parish, or borough. In Idaho, this information can be found on the Idaho State Tax Commission’s Sales and Use Tax page.
- Collection: Once the correct rate has been determined for each state and jurisdiction, businesses must collect the right amount during every transaction. For SaaS companies, this includes initial subscriptions, renewals, and the sale of any taxable goods, digital products, or services they provide.
- Filing: Many states require regular sales tax returns to be filed, typically at a frequency determined by their tax authority. In most cases, this frequency is monthly, quarterly, or annually, depending on tax liability. In Idaho, these returns can be filed through the Idaho Taxpayer Access Point or TAP.
- Remittance: After filing their tax returns, businesses will need to remit the correct amount to the state tax authority. In Idaho, returns and remittances are delivered to the Idaho State Tax Commission, both of which can be provided through the Idaho TAP portal.
Following these steps can be a solid start to the compliance process, but they are far from the only responsibilities that SaaS companies have. Providers also need to stay up-to-date on any changes in tax law, determine whether they have passed the separate nexus thresholds set by each state, maintain accurate records, and research which of their products or services are taxable.
Failure to complete these tasks can result in noncompliance, which may lead to significant fines, increased scrutiny from tax agencies, and even revocation of the right to legally operate within a state. These compliance processes, and many others, can be simplified by using a tax compliance platform such as Numeral, as well as resources offered by state and local governments.
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Tax compliance resources in Idaho
Idaho offers a number of resources that can educate or assist companies with tax compliance, including:
- The Idaho Tax Commission’s Official Website
- The Tax Commission’s Compliance Page
- The Tax Commission’s Sales and Use Page
The Idaho State Tax Commission can also be reached by dialing 1-800-972-7660. Their call center hours are 7 a.m. to 4:30 p.m. Pacific Time, Monday through Friday.
The bottom line
Although SaaS is not explicitly taxed in Idaho, certain digital goods, such as canned software and digital media, are subject to sales tax. Whether or not a business needs to collect and remit taxes in Idaho depends on factors like nexus — physical nexus is established by having a physical presence in the state, and economic nexus occurs when a business surpasses $100,000 in gross sales to Idaho customers within the current or previous calendar year.
Even if SaaS providers are exempt in Idaho, they may still face tax obligations in states where SaaS is taxable. To remain compliant, SaaS companies must register in states where they have nexus, calculate and apply the correct tax rate, collect taxes during transactions, and remit them along with regular tax returns. Given the complexity of multistate compliance, SaaS providers may benefit from using a platform like Numeral alongside tax resources provided by each state.
